The linkage between inward investment and outward investment in the Venture Capital industry

Abstract

The linkage between the entries of foreign firms and the international expansion of host country firms has been understudied. In this study, we incorporate both the spillover effects and competition effects of foreign entrants and develop an integral framework of inward and outward investment relationship between different pairs of home and host countries. Our analysis of Venture Capital (VC) investments worldwide of 1980-2007 period shows that there is a strong connection between the inward and outward VC investments of pair countries. Moreover, this connection is contingent upon the relative stages of VC industry establishment of the pair countries, which entail various spillover effects and competition effects. When the host country is a laggard and the home country is a leader in the VC industry, the impact of inward VC investment on outward VC investment between the pair countries is the most prominent. Meanwhile, the host country's propensity to make outward VC investments to the home country will be enhanced with an increased number of co-investments between the two.